Markets Eye Mag 7, Fed Decision Amid Iran Tensions

**Keith Lansford** (0:05)
Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.
I'm Keith Lansford, and here is Schwab's early look at the markets for Monday, July 27th. Investors won't have much time to catch their breath this week. With a packed slate of earnings, economic data and policy decisions all competing for attention, four of the magnificent seven, Microsoft, Meta, Apple and Amazon, will headline the earnings calendar. The multiple leading AI infrastructure companies, consumer staples firms and oil and gas giants will also report results. The key macro events will mostly come midweek, starting with the Federal Reserve's policy decision and economic projections on Wednesday. Gross domestic product or GDP data and the personal consumption expenditures or PCE price index will be the highlights on Thursday. The stakes are high this week for these reports. Markets are already grappling with a wave of new US tariffs on 60 countries, rising oil prices amid renewed U.S.-Iran tensions and elevated rate hike expectations. However, despite last week's semiconductor-led pullback, earnings have remained a bright spot, and Wall Street's earnings outlook is still decidedly optimistic. Underpinning the market's resilience this year and keeping drawdowns short-lived has been the fact that earnings growth remains stellar, said Kevin Gordon, Head of Macro Research and Strategy at the Schwab Center for Financial Research. I think it's worth emphasizing that we are in a unique position when it comes to earnings estimates and revisions. Normally, at this stage of the business cycle, we do not see forward earnings growth as strong as it is today. Gordon noted that the year-over-year change in forward earnings per share or EPS estimates for the S&P 500 has surged to 32 percent. Markets have only seen growth estimates that high twice in their history, once in the aftermath of the 2008 global financial crisis and again following the 2020 pandemic. However, those rebounds came after a significant plunge in forward EPS that is not the case today, said Gordon. This AI investment cycle has biased earnings higher by a significant degree, helping support the argument that if there is a bubble, it's not in valuations but in earnings expectations.
This week's crowded earnings calendar kicks off this morning with the UK-based drug maker AstraZeneca, which has struggled this year amid a trial setback for its heart disease drug, Wyanua. Investors will then be closely watching earnings from Cadence Design Systems after the bell for a read on the AI infrastructure trade. For investors looking for evidence that the AI boom still has room to run, this week's earnings will provide plenty to parse. Tuesday will bring reports from the semiconductor equipment firm KLA Corporation, as well as the red-hot data storage giant Seagate Technology. Visa, Coca-Cola and Boeing will also be in the spotlight that day. Microsoft and Meta will be the main act for Wednesday's heavy earnings slate. After investors punished Alphabet for raising its 2026 capital expenditures guidance to roughly $200 billion in its earnings report last week, Microsoft and Meta will face pressure to justify their AI investments. Even 82% year-over-year growth in Alphabet's cloud business wasn't enough to ease investors' concerns about the company's capital spending splurge, underscoring the challenge other hyperscalers face this week. The semiconductor equipment company Lamb Research and the chip designer Arm Holdings will also be heavily scrutinized Wednesday, alongside Qualcomm and Procter & Gamble. On Thursday, Apple, Amazon and MasterCard will be in focus, while the oil and gas giants Chevron and ExxonMobil will cap off the earnings frenzy on Friday.
Turning to economic data this week, the only major report on the calendar today is durable goods orders. This will likely leave investors looking ahead to Wednesday's interest rate decision. As of Friday afternoon, futures trading priced in roughly 38 percent odds of a rate hike at the July meeting and more than 90 percent odds of at least one hike by year end, according to the CME's FedWatch tool. We don't expect the Fed to hike rates this week, but the likelihood of a hike this year has clearly increased the price of Brent crude back near $100, said Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. With a likely hold this week, the Fed can see a few more months of inflation data before acting. Any hot inflation prints would make a hike more likely. Martin also noted that higher energy prices could cause inflation's recent cooling trend to reverse in July's inflation reports. That means Thursday's June PCE data, while still important, may not carry as much weight as it typically does. Consensus expects a 3.4% euro-v-rise in core PCE, which excludes more volatile food and energy prices. Investors will be closely monitoring the first estimate of second quarter GDP growth on Thursday, however, with recent economic data showing consumer resilience consensus expects 2.1% euro-v-year GDP growth. Anything below that could put the Fed in a tough spot as it aims to tame inflation without weakening the economy. Treasury yields have climbed in recent weeks as investors priced in higher odds of a Fed rate hike amid rising oil prices and ongoing US-Iran tensions. The 10-year yield reached 4.7% on Thursday, its highest level in more than 18 months. However, it reports that Pakistan and China were pushing for US-Iran P-stocks sent yields lower across most of the curve on Friday. We continue to see more risks to the upside than the downside, but 5% could be a soft ceiling for the 10-year Treasury yield, said Martin. In Economic Data Friday, June new home sales picked up despite affordability challenges coming in at $628,000 versus the expected $606,000. The results could put a spotlight on May's S&P Quotality Case Schiller Home Price Index due tomorrow at 9 a.m. Eastern Time. Consensus expects a 1.1% year-over-year jump in home prices, which would only serve to exacerbate affordability issues.